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Re "saving more". We have another tool you didn't mention. Lift the cap on the income subject to social security taxes and plow that money into bonds. It's hard to induce people to save but the government can make it happen. Would be popular politically too, at least for most of the lower 3/4 of the income distribution and likely some of the rest as well

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This is taboo to say because all everyone will remember is the inflation, but the three COVID era stimuli were largely successful because the payments Americans did receive turned out to be money well spent and well saved.

Americans used the money to pay down debts, saved it (and it turned out, low-wage workers acquired skills during the lockdown to seek better-paying or better-quality jobs*) or used it to pay for some high-cost capital purchase (like a down payment on a home, a car, home improvements, appliances, furniture, etc.). The Financial Times had an podcast with an economist who said the government got a nearly 2:1 return on the stimuli (with three payments spanning one year, the federal government collected an equivalent amount of tax revenue in about 6 months).

*This is a theory posited by Barry Ritholtz in "Elvis (your waiter) has left the building." https://ritholtz.com/2021/07/elvis-your-waiter-has-left-the-building/ . What I like is that Ritholtz is the rare finance guy who doesn't shit on the worker.

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Taxes, even for social security, are not savings. Your idea is to raise taxes (take money from workers) to buy bonds which will lower interest rates, and disincentivize their use as foreign reserves. This would bring in $150 billion (the largest one time tax increase ever) but be a drop in the bucket in foreign reserves since about $10,000 billion in treasury bonds/bills/notes are issued annually, so the change in interest rates wouldn’t be big, and in any case, as Noah said, China doesn’t care about interest rates so that won’t hurt the exchange rate with the RMB.

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You're highlighting the feedback effect between budget and trade deficits. If our budget deficit wasn't so huge, we wouldn't have to issue all those bonds, and "compelled savings" such as Steven suggests would be more effective at reducing our trade deficit.

Also, annual net US Treasury issuance is about $2,500B, I think. They issue more, but it's refinancing existing debt.

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The problem politically, is that will nail upper income but not rich people who mostly live in high costs, high tax states. IOW, Democrats. Would be even less popular with those Dems than disappearing the SALT deduction, which re-appears in 2026, absent a new law.

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I think most Dems will be on board with it honestly, I don’t make that much anymore but when I did I thought the cap was pretty shitty even though I benefited. Regardless, it’s the right thing to do just for SS “solvency” (really we need to increase taxes somewhere and this seems more politically feasible than a whole new tax like a VAT). Interesting that plowing it into bonds could conceivably help our trade deficit through currency depreciation, if that’s true it’s like bonus!

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Would require Dems to have soled majority in house and senate and white house. I hope to be retired before that happens again. And last time they had it. They did not pass it.

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Always count on Lighthizer to beggar his neighbours. He's a zero-sum guy ever since he melded with Trump.

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May 24·edited May 25

My wife and I have been taking advantage of the strong dollar, and doing a lot of international travel this past year (we are currently in West Australia). This is the time to do it. When the dollar eventually collapses, it will get a lot more expensive.

Yes, I know, this has nothing to do with what's best for the US, and only to do with what's best for the Burses.

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Well, we're doing our part. South America up next

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Many are. Venezuela is emptying out, and relocating to the US. They seem to specialize in shitty governance down there. Even if a government with its shit together takes over, it never lasts, and all goes to shit. Reminds me of Jim Lahey (one of my favorite fictional characters): https://www.youtube.com/watch?v=QuoAdirVFW4

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RemovedMay 25·edited May 25
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Sorry about that. Our bad.

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Thank you for this, Noah. It made for great afternoon reading, and I now have a go-to explainer to point to for how currency exchanges work!

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Warren Buffett had a proposal several years back to address imbalance of trade. I would be very curious to hear what Noah thought of this idea. "He proposed a market-based system similar to the “cap-and-trade” arrangements currently in use to limit greenhouse gas and other pollutants. Very simply, Buffett suggested that for each dollar of exports from the U.S., the exporter would receive a government voucher entitling the bearer to import a dollar’s worth of goods or services.

The vouchers could be used directly by the exporter or sold to some third party (an importer). That is, there would be an open market for vouchers. But, since no one could import without the requisite vouchers, the value of imports would be limited to the value of exports. U.S. trade with the entire world would be balanced."

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Great summary of trade and exchange theory, Noah. I took it in college for my econ degree, but even I learned quite a bit here.

In some ways the direction of causation between "strong dollar" and "asset / bond purchases by foreigners" is secondary. Having a significant fraction of near-liquid financial assets (stocks or bonds) under the control of foreigners (particularly in a single country, particularly a potential adversary) is probably not a good idea, period. Causation matters less than the fact that your adversary then has the potential to quickly tank both your currency and your asset markets simultaneously.

Many of your problems you identify boil down to this same issue: China is an adversary that we've only recently started treating that way (one of the few things Trump got right.) As we've seen so often in the last few years, tying your economy to an adversarial state is a bad idea. Perhaps we ought to have country-specific policies in place to prevent that -- which is basically what tariffs are.

"But if Biden wins, or if someone else serious" At this point, I do not consider Trump or Biden fall into the "someone serious" category. :-)

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Would you believe "someone delirious" category?

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The voters put them there.

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Great question. I have no satisfactory answer. I wish it was just really bad luck, but that's not it.

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RemovedMay 25·edited May 25
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We check all boxes 1-5. No. 5 is one most people don't recognize. As just one small example, the USA went from a country that built an amazing interstate highway system, to one that can't repair a bridge, in just a couple of generations. Our pols do a lot of yammering about "infrastructure" funding, but then it gets spent on their pet social causes and/or lines the pockets of crony insiders and union payback.

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Meritocracy by its nature has high entropy and is inherently unstable.

I found I can piss off both meritocrats and socialists when I tell them that meritocracy and socialism go hand in hand. Meritocracy requires soul-crushing socialism to keep it stable. Socialism requires a soul-crushing meritocracy to keep it stable.

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"Meritocracy requires soul-crushing socialism to keep it stable."

Hmmmm. Not sure about that. But if you are referring to the 98% of the population not creating any progress, and just taking up space (thus, wanting soul-crushing socialism to give them stuff), while the other 2% drive all the progress, then yes. But, maybe you mean something different?

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RemovedMay 25·edited May 25
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"And most of the methods that the U.S. could use to depreciate the dollar are either of questionable effectiveness or would risk big problems in the financial system."

No! Raising taxes, especially progressive consumption taxes it would be highly effective and a positive gain for the financial system. We might lose a little hot money inflow but it would reduce the cost of holding US currency abroad.

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RemovedMay 25·edited May 25
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Specifically I said that the additional revenue would be in lieu of borrowing.

I see it just the opposite. The wealthy consume too much. I want to tax their consumption at a higher rate than the consumption of the less wealthy.

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Equity investment doesn’t just sit there. This is a tired left-wing argument.

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Oh, I do not doubt that the wealth consume a smaller part of their income than the non-wealthy. A pure, probably unfeasibly pure, progressive consumption tax would tax some consumption at >100%. Remember this is replacing the "income tax, the corporates income tax and the deficit. A tall order! :)

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A good discussion of a hypothetical event. No where has Mr Lighthizer or Mr Trump said that they want to devalue the dollar. The people mentioned in the articles are not Trump advisors or affiliates. They are merely wannabes who hope to influence politicians probably for their own gain. Unfortunately , a partisan piece.

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So many questions ..

If the Fed printed dollars and bought RMB, then put the RMB in a bank vault, would that: a) move the USD-RMB exchange rate in favor of the RMB; and/or b) cause US inflation or other harmful effects?

What would be the impact of a tax on US bonds held by non-US holders? Could that be implemented? Could you make the tax progressive as the size of the holders hoard increases? I suppose we could even allow centr bank holders to apply for exemptions on conditions that support policy goals....Presumably this pushes inflation down....?

If China has all this US currency and wanted to destabilize the US, could they just start giving Americans piles of cash? Presumably that causes at least same amount of inflation as printing dollars to buy back bonds?

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Another excellent post, heading conservative decade, liberal democracy at risk and China tariff's and exports all so very good.

On devaluing the dollar would have liked two see additional detail on two points. 1. Are budget and trade deficits the offsets of each other? China has made this argument to defend its surplus. Noah alludes to this when he states in regards to savings that the austerity necessary to impact exchange rates would be very detrimental. 2. Can we continue to target China with increasing Tarrif's until a mutual agreement with regards to exchange rates and trade balances is reached.

My minimal knowledge of macro economics always thought that stuff was supposed to balance out in the long run, economics has self correcting mechanisms. This does not seem to be the case or the long run is very, very long.

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Well... I guess I am very confused. My simple view of the world was:

1) Currency exchange values are an equilibrium based on underlying goods and services. One of these services are bonds which hold value. It is not clear to me bonds "crowd-out" other consumption.

2) We have been frantically trying to "devalue" the dollar with quantitative easing for the last decade. For the most part, this has not worked because of the growth in the US economy and other economies doing their own QE.

The price of the dollar is a result... trying to control it through artificial means seems pretty foolish.

Also, the trade deficit with China is somewhat dubious. China is the world's final assembler ...which means goods from across the world travel to China for final assembly. Because of the nature of this network... this is a process of accumulating surpluses + a small amount of value add to create a big transaction (deficit). This is certainly the case for electronics. Finally, the biggest value in these systems (SW/IP) is not considered. This is why deficits seem to go up, but the percentage as a part of the economy goes down. An increasing part of the economy is shifting to virtual goods anyway.

Overall, all of this seems like fighting the last war. Much better to shift focus to Mexico/Central America for low cost manufacturing and focus on the leading-edge industries (where the US already leads).

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It will all depend on costs.... in general, the USA is pretty expensive labor market. Also, to some degree, it is goodness to have neighbors who are somewhat close to your standard-of-living...it reduces border tensions quite significantly.

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May 24·edited May 24

Okay. I may be a little "off" here. But it's my physics problem solving mind. 🐰.

A. Foreign currency intervention, one approach, seems exactly what net plus US Dollar reserve nations do to us. Close ?

B. Solve for 0. Instead of Tariffs, mandate (haha unlikely but a thought experiment), that

All trade balances with the US are forced to net zero. No trade deficits. No trade surpluses.

Obviously dramatic. But. Wouldn't that force fair play in trade?

Now, I know realistically today, we want Japan and Korea to build US warships 4x faster. But I'm curious about the concept of "forced zero trade balances" as modeling experiment anyway.

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"Sterilized intervention — having the Fed buy Chinese assets and sell U.S. bonds — seems like the best option"

Hard disagree. This would have a real possibility of driving up interest costs for the Federal government at a time when they're already destabilized. Costs exceed the benefits here.

If the goal is to decrease deficits, avoid focusing on the dollar, and just do a Vicky 3 strategy (subsidize infrastructure and sign trade agreements to encourage exports, work with advanced manufacturers to open new markets, increasing economy of scale for these industries, thus lowering the trade deficit and increasing the standard of living for those workers).

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How would it drive up interest costs? Sterilized FX intervention leaves rates unchanged, and it wouldn't require changing the rate on Fed reserves either.

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May 24Liked by Noah Smith

It wouldn't necessarily require that the Fed change the Fed funds rate or IORB given that they do have other tools; but if the market can't provide demand for the selling of Treasuries (at a time of increasing funding costs and balance sheet constraints for prime brokers) the Fed will need to intervene in some way to keep interest rates in range. I don't we can assume that won't end badly.

To your point: demand has been inelastic. I just don't think we can necessarily bank on that going forward

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Oh hmm well maybe it would end badly, it depends on how well the Fed can do the sterilization. It's harder when you don't have capital controls and have to rely on market signals...but I think they could pull it off.

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My main point of that comment was really to just rep Vicky 3. But I really don't think the US should care about dollar strength at all. It's confusing dollar strength with what we actually care about (industry). Focus on what you want. Re-Industrialize! The dollar will sort itself out.

If people really care about dollar strength. Then it's gonna require something super dramatic which will not be worth the cost.

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This is terrific stuff. Thanks for the in-depth explanation of what the "strength" of our dollar really means.

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I have another option to help devalue the dollar against the Chinese currency: let all that cheap Chinese stuff in. There can still be a significant tariff on imports from China, which the US can use to heavily subsidize local manufacturing and military production. Meanwhile, cheap imports help reduce inflation and allow for interest rates to go down, which also helps manufacturing investment. As Chinese imports rise, the dollar falls, further supporting US manufacturing through additional export attractiveness. Longer term, the US can begin to impose import quotas on strategic products and even negotiate with China for them to build some factories in the US. Win-win-win: China gets to sell their stuff, the US gets to keep low inflation and interest rates along with a manageable budget deficit, and local manufacturing and military production don’t evaporate.

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America’s economy is based on its own citzens consumption. China’s is based on exports.

America ran a trade surplue from about 1880 to 1970. What happened in 1970? It was the start of a more service oreineted economy our “goods” economy started to have more competition...The worlds economy was on its ass after WWII......Everybody else has small neighborhood hardware stores and we were Home Depot....As the per capita income climbed, people don’t necessarily want to stand on a factory floor putting a gizmo in to a widget. People starting going to college, out tech industry although nacient was starting to percolate. We no longer needed to make steel, we could buy it from Japan. We no longer needed or were able to make toys...Japan did it better and cheaper.

Japanese care manufactueres also made better vehicles and boomers scooped them up. Japan made better ships and a whole host of stuff.

So what does the US sell that the world wants? Food, some food, not all food. Protectionism rules the day in most of the world food trade...but Wheat, Soybeans, Corn....we got bushels of that. Airplanes...We used to be the gold standard in airplanes...we still only have Airbus as a competitor.

Weapons.....ding ding ding....that is what the world wants from us....Other than that, it was tech, Hollywood, Music, Nike Shoes....America Cultural Icons....We make some good earth moving equipment. We used make good ocean oil platforms....and the like...Oil Services in fact made fortunes for people....But regular on washing machines? We moved our manufacturing overseas...cheaper labor and higher quality. American quality became a real problem in the 70’s and 80’s.

So if Trumps idea is to devalue the dollar for more exports? It is a ridiculous notion....We just don’t make enough stuff that can compete with overseas manufacturers...We don’t make clothing any more becasue we don’t need to and cannot afford to make it cheap enough.

The only other reason to devalue the dollar is to shrink the deficit.......as a percentage. You delibrately spark inflation.....Ask Joe Biden how that’s working for him? Our economy is less dependent on exports than ever. We’re going to become to a net exporter....unless we invent fusion reactors, Star Trek type transporters, warp drives....We are a high end manufacturere nation....If Boeing doesn’t get it shit together US manufacturing is really going to take a hit....Boeing has a quality problem becasue it has an employee problem...

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